Globalstar, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Globalstar provides mobile satellite voice and data services and sells subscriber equipment. Unless otherwise noted, financial figures below are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $21.0 | $20.5; up 2% |
| Service revenue | $17.1 | $16.2; up 5% |
| Subscriber equipment revenue | $3.9 | $4.3; down 9% |
| Operating expenses | $38.2 | $41.1; down 7% |
| Operating loss | $(17.2) | $(20.6); operating margin improved to approximately (82)% from (100)% |
| Net loss | $(129.7) | $(250.5) |
| Basic and diluted loss per share | $(0.13) | $(0.29) |
| Cash from operating activities | $2.5 | $3.8 |
| Cash used in investing activities | $(5.8) | $(1.8) |
| Cash and cash equivalents at quarter-end | $13.7 | $7.1 at December 31, 2014 |
Q1 revenue growth reflected higher service revenue, principally from subscriber growth, partly offset by lower equipment sales. Operating expenses fell mainly because depreciation declined as first-generation satellites reached the end of their depreciable lives. The net loss improved primarily because the noncash derivative loss was lower: $107.9 million versus $209.4 million. These mark-to-market losses are sensitive to Globalstar’s share price and valuation assumptions.
At March 31, 2015, debt principal was $675.1 million and carrying value was $633.1 million, including $6.5 million current and $626.7 million long-term carrying value. The senior secured facility was fully drawn and matures in December 2022. The Thermo loan bears 12% interest, added to principal rather than paid currently. Total derivative liabilities were $548.5 million. Stockholders’ equity was a deficit of $39.6 million, compared with positive equity of $78.9 million at year-end 2014.
Restricted cash of $37.9 million is reserved for facility principal and interest and is not available for general liquidity. The company reported $14.0 million remaining under its Terrapin equity line at quarter-end; it raised $10.0 million in February by issuing 4.5 million shares, used as an equity cure contribution and for covenant calculations.
Business changes and management commentary
- Subscribers totaled approximately 648,900 at quarter-end, up 12% year over year. Simplex subscribers grew 15% and SPOT subscribers 10%; Duplex subscribers increased to 69,655 from 58,603.
- Service revenue increased across Duplex, SPOT and Simplex. SPOT equipment revenue fell 26%, with management attributing the decline principally to customer rebates that supported subscriber activations and service revenue.
- Management said the second-generation constellation’s Duplex restoration was completed in 2013 and described continued subscriber growth and potential ARPU increases as objectives. The filing provides no quantified earnings or revenue guidance.
- Q1 ground-related capital spending was $5.8 million. Contractual capital expenditures for ground facilities totaled $145.0 million, of which $30.5 million was estimated for the remainder of 2015 and $6.4 million for 2016. The company expected further Terrapin draws during 2015, potentially for covenant cures or liquidity.
- Subsequent to quarter-end, Hughes arrangements provided for $15.5 million of remaining contract payments to be prepaid in common stock at a 7% discount, with a related loss to be recorded when shares are issued. Ericsson agreed to waive $1.0 million of deferred milestones and $0.4 million of accrued interest; the filing says these amounts were reversed in Q1.
Risks, contingencies and unusual items
- Debt covenant dispute: Globalstar said it believed it complied with facility covenants at December 31, 2014 and March 31, 2015. The lender agent asserted that one financial covenant was not met for the December 2014 period; the company disputed the agent’s interpretation and was discussing calculations. A default could permit acceleration of debt, with potential cross-acceleration consequences.
- Thales matters: A settlement-related contract termination charge of €17.5 million remained accrued. The related payment condition had not been met, and the settlement agreement could be terminated by either party. Separately, Thales disputed Globalstar’s claimed ownership of long-lead satellite items; the company said it could not predict the outcome. Confirmation of an earlier arbitration award, if pursued successfully, could materially harm financial condition, results and liquidity.
- Funding and financing: The facility is fully drawn, secured by substantially all domestic assets and subject to restrictive covenants. Interest is floating-rate; the company estimated that a 1 percentage-point rate change would affect annual interest expense by approximately $5.8 million. Additional share issuance could dilute existing holders.
- Other exposures: Globalstar reported foreign-currency exposure without current currency hedges, satellite and gateway operating risks, and substantial ground-network commitments. It identified no material change to the risk factors in its 2014 annual report.
Most important facts for investors to verify
- Outcome of discussions with the facility agent over the disputed December 2014 covenant calculation and the company’s compliance in future periods.
- Available liquidity and the terms, remaining capacity and potential dilution from Terrapin funding and stock-based contract payments.
- Progress and cash requirements for Hughes and Ericsson ground upgrades, and whether gateway sale and deployment plans proceed as expected.
- Status and possible financial consequences of the Thales settlement, arbitration-related matters and long-lead-item ownership dispute.
- Effect of share-price movements and assumptions on the $548.5 million derivative liability and reported earnings.